Liquidation of Financially Distressed S Corporations: Mastering Tax Implications of Liquidating Distributions

Description

S corporation liquidations generally are subject to the same rules as C corporations. However, the lack of entity-level tax creates different tax considerations. In some cases, there may be some corporate level problems, such as the built-in gains taxes. Tax advisers must be aware of the Subchapter C rules, especially those concerned with gain or loss recognition on the distribution.

Also, Subchapter S contains rules concerning the pass-through character of income, gain, and loss. Consequently, tax professionals advising the corporation and its shareholders must calculate the tax impact for shareholders, who ultimately bear the tax burden of the liquidation.

Crucial to tax-efficient planning in S corp liquidation situations is the accurate calculation of S shareholders' "outside" tax basis in their shares and the S corporation's "inside" tax basis in its assets. Advisers must have a comprehensive basis schedule for all shareholders. Other special rules concern the distribution of installment receivables, debt instruments held by shareholders.

Finally, there are some special considerations for unsuccessful corporations. Because a complete liquidation will cause any shareholder's suspended losses to be extinguished, the timing of the liquidation is a significant issue in planning.

Listen as our experienced panel provides a detailed examination of the tax rules and planning considerations to address in the dissolution and liquidation of S corporations and offers case studies to illustrate tax treatments to shareholders under various liquidation scenarios.